Tickers discussed: SPY QQQ IWM DIS Key Reversal patterns
The Daily Profit Compass provides the stock market analysis for the day. Key levels and trading locations for the indexes are provided, along with trading plans and timely commentary to keep you on the right side of the trade.
- Asian and Euro Markets lower by 0.5-1.5%
- US Futures fluctuating wildly with multiple attempts to rally being thwarted.
- Disney CEO Bob Iger stepping down immediately
- $BYND coming to $SBUX
- Sanders and Bloomberg received most of the incoming fire as the Democratic debate turns chaotic
- Walmart launches fulfillment business
What a reversal might look like
Thoughts of a bounce yesterday look stupid in hindsight as the market legs lower. The market action shines a bright light on the need for mental flexibility as we’ve been discussing in the market psychology topics of late. Follow price signals and let them over-ride what you think ought to happen.
Strategy and Key thoughts
- Lots of technical damage on charts as many trend lines break. These will be hard to repair short term
- Back testing the Breakout. The SPY breakout was at $300ish; QQQ broke out at $194. Really not that far away. A back test of these breakout levels would be a common technical event. Tons of buyers would be waiting there if we made it that far.
- Positioning: Price of course will dictate moves, but I’d like to recycle into fresh short positions if we get a bounce into either resistance or key fib level.
- Get tactical in your trading and thinking. The market has given folks easy longs that they could sit in for months. I think the environment is going to get tougher and that is where technical trading shines.
- Market Direction: The downside rubber band is stretched. It can either break causing a day of pure panic selling or snap back for a sick rally. Be mentally prepared for either.
- The Corona Virus: The problem with this Corona scare is that no one will ring a bell to sound the all-clear to buy stocks. ( Remember 2 weeks ago when they told you it was like a bad cold, not to worry, and to expect a fast V-shaped recovery ? ) We have not even measured the shock in the economic data yet. What happens when the PMI and GDP data starts rolling in? The pall cast by Corona may linger for months and months …..doesnt sound like a recipe for a V-shaped, its all better now, recovery. I think it will take time to heal.
Common Candlestick Reversal Patterns
3 Bar Reversal Examples
The 3 bar reversal set up is a common reversal pattern. It usually takes the form of a Hammer / pin bar starting red, then going green. Once you see the “hammer bar” go green the confirmation signal is the next bar being green. The bigger the green candle the better. Conservative traders wait until price is above the last red bars high water mark before going long. More aggressive traders take the trade on any green bar, no matter how big. A happy medium for me is to see that third bar go at least half way up the prior red bar. Your stop can be at either the candle body low of the hammer bar or at the pin bar low. The bullish engulfing 3 bar reversal is pretty self explanatory. After the bullish engulfing bar, you want to see a follow up green bar as confirmation. THe bullish abandoned baby example, while certainly possible, is not very common.
2 Bar Pipe / Pinocchio Reversal pattern
The idea here is that you get a “whoosh” downside flush bar that is immediately “eaten” by an equally large or larger green bar. Some call this a Pinocchio set up because the first bar is a “liar”. If there is a problem with this set up it is that it is hard to get a tight stop because these bars can be quite large in relative terms.
Index Chart Review
From the chart, price stopped right on gap support from way back when. Certainly room for price to fill those 2 back to back gaps to $307.50 ish. If we bounce here, I see a relatively east path to $317.50, but gets harder from there. Crossing back above $320 – $320.73 resistance zone will be a lot tougher but if price breaks through, the next stop would be the bottom of the gap. Once into the gap, should be off to the races. Keep in mind, these bounce moves could take days, but the levels will remain the same.
SPY 4 hour.
A perfect view of the Volume / Price wall at $320. Getting price to be re-accepted into the upper value area will be a challenge. You can also see that a move below yesterdays low that price will be in a thin zone with not a lot of price discovery. Price could move fast.
SPY 60 min
If price loses yesterdays low, my target would be $307.50. If full blown panic sets in, a move all the way back to $303 cant be ruled out. On the upside, there is a relatively clear path to back test $320 with $317.50 as an intermediate level where some resistance can be encountered.
From the chart you can see there is a ledge of volume / price support at $214. Below $214, the volume / price support falls away fast into a thin zone where price could move fast. THe Iran overnight spike low was $211.41. SPY took out its Iran low yesterday. From a symmetry standpoint, I could see price finding $211.40. Below $211, all bets are off. Again from the chart, the next big level of support is not until $202
Nice view of the volume / price wall at $218. The zone between $218 – $224 price will have to grind through a lot of resistance. I don’t think any move toward $224 will a straight and easy shot. Above $224 and things open up with the gap.
QQQ 60min chart
From this view, the bounce progression levels are 218, 220, 220.40, $224.25, then the big gap. On the downside, a break of yesterdays lows opens the door to the Iran low at $211.41. Below that we visit PunkyTown.
Price is below the 200ema which will be a layer of resistance going up. THe next level of over head resistance is $160 which will be tough to get through. On the downside, a break of yesterdays lows there is not much downside lateral support. I could envision price making a run to fill that open gap to $152.
Not all that helpful a look, but view does show the consolidation area between $161.50 and $163. If price were to break above $160, those would be natural levels to target.
Price is trading below key support. With Iger leaving and the market weak, price could go fast within the big open gap to the $116-114 zone.
Checking in on Big-Cap Tech
Running late, so no updated charts but will annotate what i see.
$FB I expect the $195-$193 area to hold where the 200ema comes in. Unless things get ugly, I will close my short position if it looks like we are going to bounce or if the 200ema holds. If it breaks, all bets are off and much lower prices will come.
Dreadful day for longs. Below $289 and the door is open to $278. If price were to kick back to $298 / $300 it would offer another bite at the apple for a short entry. Above $303 and there is a $10 gap to fill.
Stay short against $2000 and look for $1860. If you are not in it, you need to wait until price either backtests 2000 and fails or recaptures it. Price currently in no mans land so I dont see an objective entry
Door open to $163. Price needs to recapture $170.50 to avoid more pain. A kick back to $170.50 that fails would be an objective short entry.
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